CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITED,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

These cross appeals filed by the Assessee and Revenue

respectively and Cross Objection by assessee arise from different

orders of Commissioner of Income-tax (Appeals)-I, Chennai for the

above assessment years passed u/s.143(3) and 250 of the Income

Tax Act, 1961 (herein after referred to as ‘the Act’).

First we take up Departmental appeal in ITA 2.

No.1431/Mds/2014 of assessment year 2001-2002 for adjudication :-

ITA No. 1180, 1181 & others :- 3 -:

2.1 The sole substantive ground raised by the Department

that the Commissioner of Income Tax (Appeals) erred in quashing

the re-assessment order holding that assessee has disclosed fully and

true materials available for assessment and there is no income

chargeable to tax that has escaped assessment and the assessee has

not amortizated the expenses in earlier years and assessee has not

filed a valid return.

2.2 The Brief facts of the case that the assessee is a Non-

Banking Financial company engaged in the business of financing. For

the AY 2001--02, filed its original return of income on 30.10.2001

declaring income of �15,26,12,754/- and filed revised return of

income on 29.9.03 and 24.12.03 declaring income of �14,68,46,439.

The revised return filed on 24.12.03 was processed u/s.143(1) on

10.1.2002. The assessment under section 143(3) was completed on

31.3.2004 determining the total income at �14,79,51,390/-.

Subsequently, the case was reopened u/s.147 for the reasons recorded

and notice u/s.148 dated 28.3.2008 was issued. Assessee filed a letter

requesting to treat the return of income filed on 24.12.2003 as a

return filed in response to the notice. Notice u/s.143(2) was issued on

7.5.2008 and reassessment was completed on 24.12.2008

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determining the total income at � 22,49,39,590/- after makinq

additions/disallowances.

2.3 The ld. Assessing Officer reopened the assessment u/s.147

of the Act and the reasons for reopening the assessment is that the

the assessee company in the Schedule 18 Notes to Accounts, vide

para 6.6 stated that 'profit on sale of investments is net of loss on

redemption of investments in an equity based mutual fund scheme –

�267.21 lakhs". In Scheduel-14 of P&L alc filed the assessee

company admitted a sum of Rs. 15.74 lakhs against 'profit on sale of

investments (net). By admitting only the net amount on profit on sale

of investments, there is failure on the part of the assessee to disclose

fully and truly all material facts necessary for assessment, the income

chargeable to tax has escaped assessment. The revised return was

filed by the assessee on 24.12.2003. Under Sec. 139(5), any person

having furnished a return under sub-section (1) of sec. 139 discovers

any omission or any wrong statement therein, he may furnish a

revised return at any time before the expiry of one year from the end

of the relevant assessment year or before the completion of

assessment whichever is earlier. In this case, the revised return was

filed on 24.12.2003, i.e. well beyond one year time limit fixed.

Therefore, the revised return of income filed on 24.12.2003 is not

ITA No. 1180, 1181 & others :- 5 -:

valid in law. Therefore, the assessment made u/s.143(3) on 31.3.2004

based on the revised return and excess

allowance of loss requires to be withdrawn". The AO has done the re-

assessment on the original return of income based on the letter of

assessee dated 22.12.03 admitting a mistake with regard to capital

gain offered for taxation and held that the assessee has not disclosed

the true and full facts in the original return of income. The ld.

Assessing Officer has come to the conclusion that assessment done

on an invalid return of income is not valid and ignored the assessment

passed u/s 143(3) of the Act on the revised return of income filed on

24.12.03. Aggrieved by the Assessing Officer order, the assessee filed

an appeal before the Commissioner of Income Tax (Appeals).

2.4 In the appellate proceedings, the ld. AR vehemently argued

that in the original return of income filed on 30.10.2001 for the AY

2001-02, assessee has clearly given details of profit on sale of

investments of �3,81,07,719/- and loss on sale of investments of �

3,65,34,213/- separately in the computation of total income for the

year ended 31.3.2001, by adding back the losses to the profits as per

Profit and Loss account' i.e. loss as per books has been disallowed and

reduced profit on sale of investments from the profit as per profit and

loss account to consider these profits separately under the head

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"Capital Gains". The net amount of profit on sale of investments after

deducting the loss on sale of investments of � 3,65,34,213/- from the

profit on sale of investment of � 3,81,07,719/- comes to

�15,73,506/-. From the above facts, it is clear that the assessee

company has not disclosed only tile

net amount(but also disclosed gross figures), hence there is no failure

on the part of the assessee to disclose fully and truly all materials

necessary for assessment and there is no income chargeable to tax

has escaped assessment. Regarding the revised return of income filed

belatedly, it is submitted that the assessment order passed u/s.143(3)

was on the basis of revised return of income and the revised

computation of total income submitted by the assessee. Having

accepted the revised return and the revised computation and also after

passing an order on the basis of the same, the AO cannot now claim

that the revised return was barred by limitation. Hence there is no

failure on the part of the assessee to disclose fully and truly all

material facts necessary for assessment. Reopening of assessment on

the same set of facts would amount to change of opinion.

2.5 As per the first proviso to sec. 147, no action can be taken after

the expiry of four years from the end of the relevant assessment year.

In the present case, the assessee had filed/disclosed all material facts

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at the time of original assessment which was accepted by the AO

while completing the assessment u/s.143(3) of the Act. Hence the

reopening of assessment beyond four years from the relevant AY is

invalid and bad in law and amounts to change of opinion. Further, the

assessee brought on record the reasons to substantiate that re-

assessment proceedings are bad in law:- • The objection of the assessee should had been disposed off separately and before the passing of the assessment order u/s. 143(3) r.w.s.14 7. • That the reassessment proceedings were initiated beyond a period of four years despite the fact that all the material facts were truly disclosed at the time of original assessment; • Power conferred by sec; 147 does not provide a fresh opportunity to the AO to correct an incorrect assessment. • That the notice issued by the AO was nothing but change in opinion; • The AO had issued notice for reassessment on totally irrelevant and non existing reasons. • There was no new tangible material before the AO to form belief that the income of the assessee had escaped assessment ; • That tile reassessment proceedings were just enquiry or verification of the assessment proceedings already completed ;

and relied on Apex Court and various High Court orders. The ld.

Commissioner of Income Tax (Appeals) on perusal of the original

return of income filed on 30.10.2001 for the AY 2001-02, were the

assessee has clearly given details of profit on sale of investments of

�3,81,07,719/- and loss on sale of investments of �3,65,34,213/-

separately in the computation of total income for the year ended

ITA No. 1180, 1181 & others :- 8 -:

31.3.2001, by adding back the losses to the profits as per Profit and

Loss account i.e. loss as per books has been disallowed and reducing

profit on sale of investments from the profit as per profit and loss

account to consider these profits separately under the head "Capital

Gains". The net amount of profit on sale of investments after

deducting the loss on sale of investments of �3,65,34,213/- from

the gross profit on sale of investment of �3,81,07,719/- comes to

�15,73,506/-. It is also noticed that the assessee has submitted its

explanation to the Assessing Officer during the re-assessment

proceedings on the original return of income. The AO should have

refrained from going ahead in concluding the re-assessment. Further,

doing on revised return of income when there is already an

assessment done on revised return of income would amount to doing

two assessments for the same assessment year on two sets of returns

of the same assessee which is again not proper. It is clear that the

assessee company has disclosed not only the net amount, but also

the gross figures and there is no failure on the part of the assessee to

disclose fully and truly all materials necessary for assessment and

there is no income chargeable to tax has escaped assessment.

Therefore, from the factual point of view, redoing of assessment on

the original return of income is bad in law. Aggrieved by the order of

Commissioner of Income Tax (Appeals), the Revenue has assailed an

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appeal before the Tribunal.

2.6 Before us, the ld. Departmental Representative argued that

notice u/s.147 of the Act is valid and relied on the findings of the

Assessing Officer were the Assessing Officer has considered

justification of reopening dealt in para 2 and 3 of his order and ld.

Commissioner of Income Tax (Appeals) though considered in para

4.1.2 of his order, the assessment is rightly reopened, the

Commissioner of Income Tax (Appeals) based on the redoing of

assessment in the original return is bad in law. The ld. Departmental

Representative further agitated that there is inheritant reasons for

issue of notice in assessment, there is no fresh evidence found in

respect of reopening and prayed for set aside of Commissioner of

Income Tax (Appeals) order.

2.7 Contra, ld. Authorised Representative of the assessee relied

on the findings of the Commissioner of Income Tax (Appeals).

2.8 We heard the rival submissions, perused the material on

record and judicial decisions cited. The only contention of the ld.

Departmental Representative being that Commissioner of Income Tax

(Appeals) has quashed the reassessment proceedings without

considering the material facts and evidences. The Assessing Officer

ITA No. 1180, 1181 & others :- 10 -:

has made assessment based on the original assessment were all

materials facts were disclosed and also revised return was filed based

on the information and the letter was filed explaining the reasons and

objection. The Assessing Officer has considered the valid reason for

reopening of assessment referred at page 3 of the assessment order

and also the Assessing Officer has provided the reasons for reopening

of assessment referred at page 218 of paper book by letter dated

08.05.2008 giving reasons for reopening of the assessment and the

assessee filed objections and details against the reopening in letter

dated 16.12.2008. Considering the facts and also the reasons

recorded by the Assessing Officer there seems to be a justification in

reopening of assessment as assessee was provided an opportunity for

the purpose of filing objections and also in the assessment

proceedings. So, considering the provisions of law and facts of the

case, we set aside the order of the Commissioner of Income Tax

(Appeals) and remit the entire file to the Commissioner of Income Tax

(Appeals) to pass the order on merits and assessee shall be provided

adequate opportunity of being heard.

2.9 In the result, the appeal of the Department in ITA

No.1431/Mds/2014 of assessment year 2001-02 is partly allowed for

statistical purpose.

ITA No. 1180, 1181 & others :- 11 -:

assessment year 2001-02: The assessee has filed Cross-objection

and there is a delay of 12 days in filing Cross-objection by the

assessee. At the time of hearing, the ld. Counsel has filed an affidavit

explaining the reasons for delay and the ld. DR has no serious

objections for condonation of delay. After hearing the submissions, we

are satisfied with sufficient and reasonable cause for filing the Cross-

objection belatedly and we therefore condone the delay and admit

the Cross-objection.

3.1 So far as, the Cross-objection is concerned, since we have

remited the issue to the file of Commissioner of Income Tax

(Appeals), for denova consideration, the Cross-objection filed by the

assessee is allowed for statistical purposes.

3.2 In the result, the Cross-Objection filed by the assessee is

partly allowed for statistical purpose.

of assessment year 2006-07:-

4.1 The assessee filed its Return of income for the assessment

ITA No. 1180, 1181 & others :- 12 -:

year 2006-07 on 29.11.2006 disclosing income of �37,58,94,721/- and

the case was selected for scrutiny and notice u/s.143(2) of the Act

was issued on 11.10.2007 and the assessment was completed

u/s.143(3) determining total income of �40,32,80,620/- by making

additions in respect of depreciation on leased asset, treasury

operations considered as business income as against STCG, Collection

expenses and information technology expense.

4.2 The first ground raised by the assessee that the

Commissioner of Income Tax (Appeals) upheld the expenditure

incurred on improvement of leasehold property, the expenditure being

wooden partitions, false ceilings, carpet, other wooden structure,

interior work renovation and improvement of leased premises and in

the nature of temporary structures were deprecation was restricted to

10% as against 100% claimed �22,00578/-.

4.3. The ld. Assessing Officer observed that the assessee has

shown WDV for depreciation purpose of �.62,59,332/- and claimed

depreciation of �.31,29,666/- as improvement on lease hold building @

100% and 50% as applicable depending on the date of acquisition.

The ld.AO observed that all the expenses were incurred towards

interior works at various places across the country in the lease hold

ITA No. 1180, 1181 & others :- 13 -:

premises where branches of the assessee company operate. The

assessee claimed the entire expenditure as deduction as there was no

benefit of enduring nature and were only temporary in nature. The ld.

Assessing Officer held that these expenses can neither be treated as

temporary wooden structures nor allowed as repairs and need only to

be capitalized and relied on the following case laws :- 1.M/s. Indian Metal & Metallurgical Ltd (141 ITR 40) 2.Mls. Empire Jute Mills 124 ITR 1 (SC) 3. CIt vs. Saravana Spinning Mills Private Limited (293 ITR 201) (SC) 4. Bigjo's Indha Lld vs. CIT (2931TR 170)

The Assessing Officer treated the wooden partition, interior works in

renovation and improvement in the leased premises and also no proof

of lease period was provided and the expenditure has been incurred

for the improvement for leasehold properties to get a new advantage

and Assessing Officer disallowed the expenditure and allowed

depreciation @10%. Aggrieved by the Assessing Officer order, the

assessee filed an appeal before the Commissioner of Income Tax

(Appeals)

4.4 In the appellate proceedings, the Id.AR has argued that the

expenditure is on lease-hold building and is

temporary in nature. Expenditure like false-ceiling, partition, carpets, wooden

ITA No. 1180, 1181 & others :- 14 -:

structures etc were Incurred to make the premises habitable and hence are

not asset of enduring nature and as such the expenditure is allowable as

revenue and relied on several judicial decisions. The expenditure incurred

was for the purpose of partition, false ceilings, carpeting and wooden

structures. Explanation 1 to Sec.32 states as follows:-

"Explanation l.-Where the business or profession of the assessee Is carried on In a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or In relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee." Thus, there was no distinction between a leasehold building and own

building so far as the allowability of depreciation is concerned. The assessee

has made partitions and other works in lease hold premises by way of

renovation or improvement and is, therefore, squarely covered by

Explanation 1 to Sec. 32 of the Act. In the case of Indian Metal &

Metallurgical Ltd, reported in 141 ITR 40, even the partition works and false

ceilings were considered as capital assets. In the present case, , the

assessee has put up wooden partitions and other interior works by way of

renovation and improvement in the leased premises. Since it is an

improvement on the building, it is capital in nature. There is no odd and fast

rule that all the expenditure on leasehold premises will partake the character

of revenue expenditure. The expenditure incurred by the assessee is

ITA No. 1180, 1181 & others :- 15 -:

definitely for improving the leased premises, making it fit for carrying out its

business. Further the improvements carried out by the assessee on the

leased premises are not meant for dismantling in the same year or in the

next year. In view of the above, the decisions relied on by the ld. Assessing

Officer are quite appropriate and the AO is justified in disallowing the same

as capital expenditure as per Explanation 1 to Sec. 32 and allowing

depreciation on the same and accordingly the ld. Commissioner of Income

Tax (Appeals) dismissed the ground of the assessee. Aggrieved by the

order of Commissioner of Income Tax (Appeals), the assessee assailed

an appeal before Tribunal.

4.5 Before us, the ld. Authorised Representative of the assessee

reiterated the submissions made before the Assessing Officer and

Commissioner of Income Tax (Appeals) and argued that the Assessing

Officer has disallowed the depreciation based on the decision of

Madras High Court in the case of Indian Metal & Metallurgical Ltd

(supra), the said expenditure incurred by the assessee is not on

temporary structures and same cannot be dismantled and also relied

on the decision of Supreme Court in the case of CIT vs. Saravana

Spinning Mills Private Ltd. 293 ITR 201. The assessee is eligible for

100% depreciation for purely temporary structures as per Sr.No.4 of

Part A in the New Appendix I to Income Tax Rules, 1962 and relied on

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the findings of the Hyderabad Tribunal in the case of Shalivahana

Constructions Ltd vs. DCIT (2007) 12 SOT46, were the assessee is a

tenant and expenditure is incurred on partitions, false ceilings, carpets,

wooden structures only to make it fit for business of the assessee

company and relied on the following decisions :-

(i) Thiru Arooran Sugars Ltd (2013) 31 taxmann.com 3 (Mad) (ii) Ayesha Hospitals (P) Ltd (2007) 291 ITR 266 (Mad) (iii) CIT vs. Madras Auto Service (P) Ltd 233 ITR 468 (Mad). (iv) CIT vs. Amrutanjan Finance Ltd (2011) 15 taxmann.com 392 (Mad)

and prayed for allowing the appeal.

4.6. Contra, the ld. Departmental Representative relied on the

orders of the lower authorities and opposed the ground of the

assessee.

4.7 We heard the rival submissions, perused the material on

record and judicial decision cited. The ld. Authorised Representative

contention that improvement or lease assets are purely in the nature

of temporary structure consisting of false ceilings, carpet and other

wooden strucutre’s and has been incurred only for the improvement

of business but on perusal of the assessment order the expenditure

incurred by the assessee on yearly basis. The ld. AR submitted that

ITA No. 1180, 1181 & others :- 17 -:

materials utilised does not have resale value and after removal there

will not fetch any value and additional cost has to be incurred for

removal. The fact that Assessing Officer has considered the

improvements shall have a new advantage and improving assets.

The ld. Departmental Representative relied on the order of thee

Commissioner of Income Tax (Appeals) order were it is observed that

improvement of the building and the type of expenditure incurred is of

capital in nature. We on perusal of the assessment order could not

establish, whether the assessee has provided list of leased premises

and also rental agreements entered during the financial year. When

substantial expenditure has been incurred on leased premises and no

prudent business organisation shall dismantle the temporary structure

and incur additional expenditure every year. The assessee has

supported the cost incurred on improvement of leasehold premises but

there was no occasion for the Assessing Officer to verify whether the

lease period is for one year, two years, five years, eight years for more

than eight years. If the lease period is for a longer period definitely

such expenditure is going to provide additional benefit of enduring

nature. Therefore, considering the facts and circumstances, judicial

decisions and also type of expenditure incurred, we set aside the

order of the Commissioner of Income Tax (Appeals) and remit the

entire issue to the file of the Assessing Officer for verification and

ITA No. 1180, 1181 & others :- 18 -:

genuiness of expenditure, lease agreements entered in respect of

leased properties and we also rely on the decision of Indian Metal &

Metallurgical Ltd (supra) to grant higher rate of depreciation for

partition works and false ceiling works falls under the expression

‘’fittings’’ at 15% is to be allowed and on the remaining expenditure,

the Assessing Officer shall get satisfied with the period of lease and

bifurcation of expenditure incurred towards labour material based on

material evidence and invoice copy and assessee should co-operate in

furnishing the information and ld. Assessing Officer shall provide

adequate opportunity of being heard before passing the order.

4.8 The second ground raised by the assessee is that

Commissioner of Income Tax (Appeals) erred in disallowing the

collection expenses which were not available at the time of finalization

of accounts and was received during the financial year pertaining to

assessment year 2005-06. The assessee is following Mercantile System

of Accounting and the liability has crystallized only in the assessment

year 2006-07 �41,54,054/-.

4.9. The assessee has claimed collection expenses and during

examination, the ld. Assessing Officer found that an amount of

�41,54,054/- pertains to assessment year 2005-06. The assessee has

ITA No. 1180, 1181 & others :- 19 -:

produced details of expenditure in the assessment as the ld. Assessing

Officer found that assessee is maintaining Mercantile System of

Accounting and disallowed the same on the ground of earlier period

expenditure. Aggrieved by the order, the assessee filed an appeal

before the Commissioner of Income Tax (Appeals).

4.10 The ld. Commissioner of Income Tax (Appeals) has

considered the findings of the Assessing Officer and observed that

expenses are related to incentive given to employees for collection of

dues and since assessee is maintaining Books of Accounts in Mercantile

basis and expenditure does not pertain to current financial year and

upheld the order of the Assessing Officer. Aggrieved by the order of

Commissioner of Income Tax (Appeals), the assessee assailed an

appeal before Tribunal.

4.11 Before us, the ld. Authorised Representative reiterated the

submissions made in assessment proceedings and appellate

proceedings and basic condition that the expenditure is of collection

expenses which are not received by the assessee before finalization of

accounts and also such expenditure was not provided in the Books of

accounts of earlier years and are crystallized only during the current

ITA No. 1180, 1181 & others :- 20 -:

financial year. Therefore such expenditure is eligible for deduction and

prayed for allowing the ground.

4.12 Contra, the ld. Departmental Representative relied on the

orders of the lower authorities and opposed the grounds.

4.13. We heard the rival submissions, perused the material on

record. The nature of expenditure being handled by the agents in

respect of collections. The contention of the ld. Authorised

Representative that it pertaining to assessment year 2005-06 and bills

are not received in finalisation of accounts for the relevant financial

year and there is no dispute about the genuiness of expenditure by the

Assessing Officer except mentioning that expenditure pertaining to

earlier years. The ld. Authorised Representative drew our attention to

the paper book at page 12 to 22 were the collection expense alongwith

date, invoice no. and name of the party and narration was provided

which gives the clear picture that payments are incurred by the

assessee exclusively for the purpose of business. But the question

arises whether such expenditure was provided in the Books of

accounts for the assessment year 2005-06. Prime Facie it looks that

the expenditure has crystallised only during the assessment year 2006-

ITA No. 1180, 1181 & others :- 21 -:

07 and the very purpose of mercantile system of accounting is to

device correct and clear financial statements. It is desirable to make

provisions for expenses as ascertained liability at the end of the

financial year and the nature of expenditure being prior period. The

company following mercantile accounting system and expenses not

recorded in earlier year, though crystallised in the current financial

year and same cannot be allowed as deduction because remedy does

not lie in the current assessment year. Considering the apparent facts

and accounting aspects, we upheld the order of Commissioner of

Income Tax (Appeals) in confirming the order of the ld. Assessing

Officer and dismiss the ground of the assessee.

4.14. The third ground raised by the assessee that Commissioner

of Income Tax (Appeals) erred in confirming the order of Assessing

Officer and treating the income earned from treasury operations as

business income as against Short Term Capital Gains claimed by the

assessee.

4.15 The Brief facts of the issue in dispute that the assessee

company has admitted short term capital gains of �35,47,497/- and

ITA No. 1180, 1181 & others :- 22 -:

furnished the transaction statement of sale and purchase of units. The

ld. Assessing Officer observed that the transactions were in the nature of

purchase and sale of units and Mutual funds. All the sales were effected

within 2 days of purchase. The total dividend earned by the assessee during

the year was at �1,33,00,099/- out of which only �1,600/- has been received

from Mutual Fund which shows there was no intention of the assessee to

earn capital appreciation or dividend but to deal in trading. Relying on the

decision of the Gujarat High Court in the case of CIT vs. Rewashankar A.

Kothari (206) (283 ITR 338 (Guj) and also the Board's Circular No.412007

dated 15.6.2007 the ld. AO treated the profits received from the

transactions as income from business and taxed at normal rates. Aggrieved

by the order, the assessee filed an appeal before the Tribunal.

4.16 In the appeal proceedings, the ld. Authorised Representative

submitted that the assessee has invested its surplus funds in shares and

mutual funds. It was the intention of the assessee to make investment

in shares and mutual funds and never the intention to do as business.

The assessee has admitted its income from business as business

income and the income from sale and purchase of shares as capital

gains. Merely the quantum and frequency of buying and selling of

share are more, it cannot be treated as nature of business. The

transaction wise details are filed before assessing officer which shows

ITA No. 1180, 1181 & others :- 23 -:

that the income from the treasury deployment �35,47,4961- is from

sale of investments in the mutual funds. The circular relied on by the

assessing officer is not applicable in the case of assessee as the

assessee has held these shares as investments. The ld. Commissioner

of Income Tax (Appeals) found that large numbers of units have been

purchased and sold within two

days during the year. Trading in units has been undertaken as an activity to

maximize its profits which prove that the assessee has technical and financial

strength and relying on the decision of ITAT, Ahmedabad, in the case of

Deputy Commissioner of Income-tax,

v Smt. Deepaben Amitbhai Shah [2006] 991TD 219 (Ahd.,) upheld the

findings of the Assessing Officer. Aggrieved by the order, the assessee

assailed an appeal before Tribunal.

4.17 Before us, the ld. Authorised Representative reiterated the

submissions before assessment and appellate proceedings and filed

explanations that the income on sale of short term investments in mutual

funds is offered to tax as short term capital gains and these transactions are

made from temporary surplus and they are invested by the assessee in the

debt funds of mutual funds and intention of the assessee at the time of

acquisition of same to hold them as investments and liquidate them as and

when there is a necessity and it is different activity and subject to some risk.

ITA No. 1180, 1181 & others :- 24 -:

The investments in mutual funds are made out of own funds with minimum

risk and also submitted his arguments with the decisions of CIT vs.

Associated Industrial Development Co. (P) Ltd (82 ITR 586), Trinetram

Consultants (P) Ltd vs. DCIT 34 taxman.com 39, Janak Rangwalla vs. ACIT

11 SOT 627 and prayed for treating the such income as short term capital

gain.

4.18. Contra, the ld. Departmental Representative relied on the

orders of the lower authorities and opposed to the ground of the

assessee.

4.19 We heard the rival submissions and perused the material on

record and judicial decisions cited. The only disputed issue in respect

of taxability of income to be treated as short term capital gain or

business income. The ld. Authorised Representative emphasized that

assessee invested excess temporary surplus into mutual funds and

liquids funds and this being a finance company the money cannot be

kept idle as interest has to paid on borrowings and such activities

cannot be termed as business income. The ld. Authorised

Representative drew our attention to the profit of treasury deployment

were purchase and sale of mutual funds units and liquid fund were

transacted and holding period is less than four days. Further we

ITA No. 1180, 1181 & others :- 25 -:

found that the assessee is parking the funds only for the capital

appreciation and liquidate as per the requirement within day or two

without disturbing the basic business operations and such investments

are disclosed in the Balance sheet. Considering the nature of

investment strategy and utilization of the funds, we are of the opinion

that the strategy of systematic investment is only for the temporary

accommodating of investment in liquid funds and income from

treasury operation are to be treated as short term capital gains

considering the apparent facts, we set aside the order of the

Commissioner of Income Tax (Appeals) and direct the Assessing

Officer to treat the income as short term capital gains and allow the

ground of the assessee.

4.20. The last ground raised by the assessee in this appeal is that

Commissioner of Income Tax (Appeals) erred in confirming

disallowance of information technology expenses pertaining to

assessment year 2005-06.

4.21 The Brief facts of the issue is that the assessee has claimed

information technology expenses of �4,60,270/- pertaining to

assessment year 2005-06. Since the assessee is maintaining Book of

Accounts on Mercantile basis, the ld. Assessing Officer disallowed the

expenditure in current assessment year. Aggrieved by the order, the

ITA No. 1180, 1181 & others :- 26 -:

assessee filed an appeal before the Commissioner of Income Tax

(Appeals).

4.22 In the appellate proceedings, the ld. Authorised

Representative made submissions that the expenditure pertaining to

assessment year 2005-06 was claimed as the bills were not available at

time of the finalization of accounts for assessment year 2005-2006 and

the same was provided in the assessment year 2006-07 and also no

provision for expenses was made in the Books of accounts as on

31.03.2005. The contention of the assessee being such expenditure

related to earlier years and liability has accrued and crystallized in the

year and claim in the current assessment year but ld Commissioner of

Income Tax (Appeals) concurred with the findings of the Assessing

Officer. Aggrieved by the order of Commissioner of Income Tax

(Appeals), the assessee assailed an appeal before Tribunal.

4.23. Before us, the ld. Authorised Representative reiterated the

submissions made in assessment proceedings and appellate

proceedings and the basic conditions that the expenditure in the

nature of technology expenses are not received by the assessee

before finalization of accounts and such expenditure was not provided

in the Books of accounts of earlier years as they were crystallized only

ITA No. 1180, 1181 & others :- 27 -:

during the current financial year and eligible for deduction and prayed

for allowing the ground.

4.24 Contra, the ld. Departmental Representative relied on the

orders of the lower authorities and opposed the grounds.

4.25 We heard the rival submissions, perused the material on

record and the expenditure of information technology. The

contention of the ld. Authorised Representative as it pertain to

assessment year 2005-06 were bills are not received before finalisation

of accounts for the financial year and there is no dispute about the

genuiness of payments and expenditure by the Assessing Officer

except mentioning that expenditure pertaining to earlier years and the

very purpose of mercantile system of accounting is to derive correct

and clear financial statements. It is desirable to make provision for

expenses as ascertained liability at the end of the financial year and

the nature of expenditure being prior period. The company following

mercantile accounting system and information technology expenses

not recorded in earlier year, though crystallised in the current financial

year and same cannot be allowed as deduction because remedy does

not lie in the current assessment year. Considering the apparent facts

and accounting aspects, we upheld the order of Commissioner of

ITA No. 1180, 1181 & others :- 28 -:

Income Tax (Appeals) in confirming the order of the ld. Assessing

Officer and dismiss the ground of the assessee.

4.26 In the result, the appeal of the assessee in ITA

No.1181/Mds/2014 is partly allowed for statistical purpose.

5 Now, we take up ITA No.1180/Mds/2014 of 2005-06:- The

first ground raised by the assessee that the Commissioner of Income

Tax (Appeals) has upheld the expenditure incurred on improvement of

leasehold property, the expenditure being wooden partitions, false

ceilings, carpet, other wooden structure, interior work renovation and

improvement of leased premises and the nature of temporary structure

were deprecation was restricted to 10% as against 100% amounting

to �16,16,450/-.

5.1 We have considered the facts and submissions made by

the ld. Authorised Representative and Departmental Representative

were similar issue was adjudicated by us for the assessment year

2006-07 in ITA No.1181/Mds/2014 at para 5.6, and we partly allow

the ground of the assessee.

ITA No. 1180, 1181 & others :- 29 -:

5.2. The second ground raised by the assessee is that

Commissioner of Income Tax (Appeals) erred in confirming the order

of Assessing Officer and treating the income earned from treasury

operations has business income as against Short Term Capital Gains

claimed by the assessee to the tune of �65,77,380/-

5.3 We have considered the facts and submissions made of ld.

Authorised Representative and Departmental Representative were

similar issue was adjudicated by us for the assessment year 2006-07 in

ITA No.1181/Mds/2014 at para 4.19 and we allow the ground of the

assessee.

5.4 The last ground raised by the assessee with respect to

allowability of deduction u/s.80G of the Act �7,00,000/-.

5.5 The ld. Counsel submitted that donation is towards Tsunami

relief and eligible for 100% deduction. At the time of hearing, the ld.

Counsel has not pressed the ground and made a endorsement in the

appeal petition and accordingly, we treat the ground as dismissed.

5.6 In the result, the appeal of the assessee in ITA

No.1180/Mds/2014 of assessment year 2005-06 is partly allowed.

ITA No. 1180, 1181 & others :- 30 -:

first ground raised by the assessee is that the Commissioner of Income

Tax (Appeals) has upheld the expenditure incurred on improvement of

leasehold property, the expenditure being wooden partitions, false

ceilings, carpet, other wooden structure, interior work renovation and

improvement of leased premises and the nature of temporary structure

were deprecation was restricted to 10% as against 100% amounting

to �4,15,36,787/-.

6.1 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative, were

similar issue was adjudicated by us for the assessment year 2006-07 in

ITA No.1181/Mds/2014 at para 4.7 and we partly allow the ground of

the assessee.

6.2 The next ground raised by the assessee that the

Commissioner of Income Tax (Appeals) erred in confirming the order

of Assessing Officer in disallowance u/s.14A of the Act.

6.3 The brief facts of the issue that the assessee company has

received exempted income of �1,03,58,726/- as dividend on shares.

ITA No. 1180, 1181 & others :- 31 -:

The dividend income has been received out of investments made in tax

free securities. The ld. Assessing Officer found that the assessee has

not disallowed any expenditure incurred on earning such income and

made disallowance u/s.14A of the Act applying Rule 8D and made a

addition of �96,03,800/-. Aggrieved by the order, the assessee filed

an appeal before the Commissioner of Income Tax (Appeals).

6.4 In the appellate proceedings, the assessee raised the

grounds that assessee company has not incurred any expenditure for

earning dividend income and no expenditure was estimated and

claimed as deduction. The ld. Commissioner of Income Tax (Appeals)

considering the submissions and upheld the order of the Assessing

Officer. Aggrieved by the order of Commissioner of Income Tax

(Appeals), the assessee assailed an appeal before Tribunal.

6.5 Before us, the ld. Authorised Representative reiterated the

submissions made in the assessment proceeding and appellate

proceeding. Disallowance of expenditure by applying Rule 8D is not

correct. The provision of Rule 8D are applicable only from assessment

year 2008-09 as per the Bombay High Court decision in the case of

Godrej & Boyce Mfg. Co. Ltd vs. DCIT 194 Taxmann 203 and the

ITA No. 1180, 1181 & others :- 32 -:

assessee has not incurred any expenditure in earning exempt and no

disallowance u/s.14A r.w. Rule 8D is valid.

6.6 Contra, the ld. Departmental Representative relied on the

orders of the lower authorities and opposed the grounds.

6.7 We heard the rival submissions, perused the material on

record and judicial decision cited. The assessee is in the business of

fiancé and ld. Authorised Representative explained that the provisions

of Sec. 14A r.w.s Rule 8D are not applicable and no disallowance is

warranted. On perusing the assessment order, the assessee has

calculated the disallowance under Rule 8D by applying the provisions

of rule 8D(2)(i)(ii)(iii). No doubt the facts of the case are similar to

any finance company were investment strategy apply. The provisions

of Rule 8D has come into effect by Finance Act, 2008 from 24.03.2008,

the current assessment year is prior to the applicability of provisions

under Rule 8D which has come into operation from assessment year

2008-09. Considering the amendment criteria and Jurisdictional High

Court decision in the case of Simpson and Co. Ltd vs. DCIT in Tax

T.C.(A) No.2621 of 2006 dated 15.10.2012 held to disallow 2% of

exempted income as disallowance u/s.14A of the Act. Accordingly by

ITA No. 1180, 1181 & others :- 33 -:

applying ratio, we direct the Assessing Officer to disallow 2% of

exempted income and partly allow the ground of the assessee.

6.8. In the result, the appeal of the assessee in ITA

No.1182/Mds/2014 of assessment year 2007-08 is partly allowed.

filed by the Revenue that the Commissioner of Income Tax (Appeals) erred

in allowing the deprecation at 60% on UPS as against allowed by the

Assessing Officer @15% of the value and the Commissioner of Income Tax

(Appeals) has not followed the decision of Delhi Tribunal in the case of

Nestle India Ltd vs. DCIT 111 TTJ 498 where UPS is not treated as integral

part of computer systems and higher deprecation is allowed.

7.1 The assessee has claimed depreciation at the rate of 60% on

UPS battery, stabilizers as the integral part of computer block. But the ld.

Assessing Officer observed that computers can work without stabilizer and

battery and thus instruments are only regulating the voltage and

uninterrupted power supply and cannot be eligible for higher depreciation

and allowed deprecation @15% and disallowed �23,39,932/- as excess

depreciation. Aggrieved by the order, the assessee filed an appeal before

Commissioner of Income Tax (Appeals).

ITA No. 1180, 1181 & others :- 34 -:

7.2 The ld. Commissioner of Income Tax (Appeals) considered the

submissions of the assessee and grounds and relied on the decision of

assessee’s own case for the assessment year 2006-2007 were UPS, battery

and stabiliser are included in the block of the computer. Without these

gadgets computer cannot be operated and are considered as integral part of

computer and they are essential for working and directed the Assessing

Officer to allow deprecation @60%. Aggrieved by the order, the Revenue

assailed an appeal before us.

7.3 Before us, ld. Departmental Representative relied on the

grounds and argued that UPS cannot be considered as integral part of

computer and have separate identity and eligible for deprecation @15%

only.

7.4 Contra, the ld. Authorised Representative relied on the orders of

Commissioner of Income Tax (Appeals) and opposed to the grounds of

the Revenue.

7.5 We heard the rival submissions, perused the material on

record and judicial decision cited. The assessee company

considered batteries, stabilizers as part of computer block and

ITA No. 1180, 1181 & others :- 35 -:

claimed the deprecation. The fact that computer alone cannot work

without the support of UPS, batteries and stabilizers. No doubt they

are regulating the voltage stability of the electricity. If there is

power fluctuation without these usage gadgets the computer will

malfunction and the data will be lost. So, considering the usage

and essentiality of the product being integral part of computer, we

upheld the order of Commissioner of Income Tax (Appeals) in

directing the Assessing Officer to allow deprecation @60% and

dismiss the ground of the Revenue.

7.6 In the result, the appeal of the Revenue in ITA

No.1412/Mds/2014 is dismissed.

ground raised by the assessee is that the Commissioner of Income

Tax (Appeals) has upheld the expenditure incurred on

improvement of leasehold property, the expenditure being wooden

partitions, false ceilings, carpet, other wooden structure, interior

work renovation and improvement of leased premises and the

nature of temporary structure were deprecation was restricted to

10% as against 100% amounting to �8,99,76,815/-.

ITA No. 1180, 1181 & others :- 36 -:

8.1 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative,

were similar issue was adjudicated by us for the assessment year

2006-07 in ITA No.1181/Mds/2014 at para 4.7, we partly allow the

ground of the assessee.

8.2 The second ground raised by the assessee that

Commissioner of Income Tax (Appeals) erred in confirming the

order of Assessing Officer and treating the income earned from

treasury operations has business income as against Short Term

Capital Gains claimed by the assessee �2,04,45,542/-.

8.3 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative,

were similar issue was adjudicated by us for the assessment year

2006-07 in ITA No.1181/Mds/2014 at para 5.18, we partly allow

the ground of the assessee.

8.4. The last ground raised by the assessee is that Commissioner

of Income Tax (Appeals) erred in confirming the order of Assessing

Officer in disallowing u/s.14A of the Act �8,32,63,000/-. The

assessee earned exempted dividend of �4,12,381/- and the

ITA No. 1180, 1181 & others :- 37 -:

assessee made aggregate investments in tax free securities

�1,73,93,41(000)/-.

8.5 In the assessment proceedings, the Authorized

Representatives computed and provided the quantum of

disallowance u/s. 14A read with Rule 8D and arrived at �2.2 lakhs.

The computation is found to be incorrect as the assessee has to

consider the entire interest outflow. The very purpose of

disallowance of interest corresponding to the tax-free investment

are in proportion to the overall investment. The

concept of direct and indirect expenses found in Rule 8D is a

measurement for direct cost towards transaction in these

investments like STT payments, Demat charges and indirect cost

would include all costs towards holding such investments. Further,

the assessee had considered the investment of �129,39,(000) only

being the investment in long term non-traded unquoted shares and

had failed to consider (a) current non-trade unquoted investments,

and (b) long term investment in subsidiaries unquoted. The only

exclusion that can be provided is that of long term non-trade

quoted investments in Government securities since the return on

its income is offered to taxation while in the case of the rest, the

dividend remains tax-free. The magnitude of the transactions in

ITA No. 1180, 1181 & others :- 38 -:

the mutual funds during the year clearly exhibits that a specialized

attention by a dedicated team of professionals need to be deployed

either in full or part so as to earn such high

dividend income. This exercise should necessarily have a intrinsic

cost which gets hidden in the overall costs of the company. It is

improbable to deduct a specific amount of expenditure to this

specialized exercise and hence, proportionate disallowance of the

total cost attributable to the investments and operation of earning

tax free income needs to be essentially proposed. The Assessing

Officer had reasons to believe that the company has to incur a

minor expenditure embedded in the Indirect Expenditure of the

assessee towards maintaining these investments. The Delhi ITAT in

the case of Escorts Ltd., Vs ACIT reported in 102 TTJ 522 had held

that Indirect Management and Administrative Expenses qualify for

disallowance u/s 14A. Therefore, on this count also, disallowance

u/s 14A becomes mandatory. The Kerala High Court in the case of

Smt. Leena Ramachandran recently held that in such a similar

situation as described above, disallowance u/s 14A is a must and

hence Assessing Officer invoked the provision of Sec.14A. From

the P&L account it could be verified that there are no expenditure

directly attributable to the investments. Interest outgo for the year

is �3,19,65,47,(000) which includes interest on debentures,

ITA No. 1180, 1181 & others :- 39 -:

interest on fixed loans, interest on other loans and other financing

expenses. All these finance charges have been expended to obtain

loan funds for the company and such interest on loans in

proportion to investment in tax-free territory is alone found to be

arithmetically correct and reiterated that indirect cost means cost

towards funding the investment and the direct cost means cost

incurred in holding investment and Rule 8D is enforceable from

assessment year 2008-09 onwards and made disallowance of

�8,32,63,000/-. Aggrieved by the order, the assessee filed an

appeal before Commissioner of Income Tax (Appeals).

8.6 In the appellate proceedings, the Commissioner of Income

Tax (Appeals) confirmed the order of the Assessing Officer.

Aggrieved by the Commissioner of Income Tax (Appeals), the

assessee assailed an appeal before Tribunal.

8.7 Before us, the ld. Authorised Representative of the assessee

reiterated the submissions made before the Assessing Officer and

Appellate proceedings and explained the provisions of section 14A

r.w.r. 8D are not applicable to the assessee company and the Rule

8D came into effect from 23.03.2008 if at all any disallowance has

to be made retrospectively for eight days only. Whereas the

ITA No. 1180, 1181 & others :- 40 -:

Assessing Officer calculated the Rule 8D(i) Nil, Rule

8D(ii)�7,78,46,000/- and Rule 8D(iii) �54,17,000/-. The

disallowance of expenditure should only be in respect of income

does not form part of total income. The assessee has made

investments in group subsidiaries and in short term mutual funds

and the assessee invested �10 crores in subsidiary companies,

which were funded through the right issue of equity shares and

other investments are taxable to tax. The assessee while

finalizing the accounts made disallowance u/s.14A of the Act to the

extent of �2.2 lakhs and prayed that the disallowance shall be

restricted and prayed for allowing the appeal.

8.8 On other hand, the ld. Departmental Representative relied

on the orders of the lower authorities and opposed the ground of the

Revenue.

8.9. We heard the rival submissions, perused the material on

record, provisions of Sec.14A of the Act applicable to the assessee

company in respect of expenditure incurred on earning exempted

income wereas Rule 8D has come into effect from 23.03.2008

following the jurisdictional High Court decision, the Rule 8D

provisions are applicable. But the question is whether three limbs

ITA No. 1180, 1181 & others :- 41 -:

of calculation by Assessing Officer applicable to the assessee were

investment is made in subsidiary companies, short term mutual

fund and rights issue and there is adequate funds available with the

company to make investments which are not interest bearing. At

the time of hearing the ld. Authorised Representative drew our

attention to the annual accounts of the assessee company and also

referred to the schedule of investments made by the assessee

company. On perusing the schedule, the assessee has made

investments in Government securities, body corporate and mutual

funds. Further, the assessee has submitted that the investments

has been made in subsidiary companies aggregating to �62.55

crores and this investment in subsidiary company is made not to

earn any exempt income but for future profit on commercial

expediency. Further on comparison with the investments with

earlier years there is increase in investment pattern. The ld.

Counsel argued that the income from investments which yield

taxable income and offered to tax shall be excluded for the purpose

and relied on the following judicial decisions.

(i) CIT vs. Winsometextile Industries Ltd (2009)319 ITR 204 (P & H)

(ii) DCIT vs. Maharashtra Seamless Ltd (2011) 48 SOT 160 (Del)

ITA No. 1180, 1181 & others :- 42 -:

and ld. Authorised Representative drew attention to the Schedule XIV of

profit and loss account at page 14 of Annual Report wereas as per

schedule the assessee has received dividend income of �4.12 lakhs

whereas disallowance made by the Assessing Officer is �8,32,63,000/-.

Further the investments is made out of common kitty of interest free own

funds and investments in subsidiary company cannot be subject of

disallowance under Rule 8D and apply the ratio of decision in the case

of CIT vs. Hero Cycles 323 ITR 518 held as under:-

‘’If the investment in shares is out of the non-interest bearing funds, disallowance u/s. 14A is not sustainable; The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted Disallowance u/s. 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income, no expenditure has been incurred, disallowance u/s. 14A cannot stand; The contention of the revenue that even if the assessee has made investment in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, the disallowance u/s. 14A can be made, is also not justifies’’.

The assessing authority considered the submissions and disallowed

the expenditure as per provisions of Sec. 14A r.w.Rule 8D of

Income Tax Rules and the decision of M/s. Lakshmi Ring Travellers

in ITA No.2083/Mds/2011, dated 02.03.2012 and Pradeep Kar vs.

ACIT (319 ITR 416) are applicable considering the facts and

circumstances, dividend income and investments pattern of the

ITA No. 1180, 1181 & others :- 43 -:

company in subsidiary company and other body corporate. We set

aside the issue to the file of the Assessing Officer who shall re-

examine and calculate the disallowance.

8.10 In the result, the appeal of the assessee in ITA

No.1183/Mds/2014 is partly allowed.

appeal is filed by the Revenue that the Commissioner of Income Tax

(Appeals) erred in allowing the deprecation at 60% on UPS as against

allowed by the Assessing Officer @15% of the value and the

Commissioner of Income Tax (Appeals) has not followed the decision of

Delhi Tribunal in the case of Nestle India Ltd vs. DCIT 111 TTJ 498 where

UPS is not treated as integral part of computer systems and higher

deprecation is allowed.

9.1 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative,

were similar issue was adjudicated by us for the assessment year

2007-08 in Departmental appeal in ITA No.1412/Mds/2014 at para

7.5, and dismiss the ground of the Revenue.

ITA No. 1180, 1181 & others :- 44 -:

9.2 In the result, the appeal of the Revenue in ITA

No.1413/Mds/2014 is dismissed.

first ground raised by the assessee is that Commissioner of Income

Tax (Appeals) erred in confirming the order of Assessing Officer in

disallowing u/s.14A of the Act �6,75,25,000/-.

10.1 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative,

were similar issue was adjudicated by us for the assessment year

2008-09 in assessee appeal in ITA No.1183/Mds/2014 at para 8.9,

and we set aside the issue to the file of the Assessing Officer who

shall pass the order as per law.

10.2 The next ground raised by the assessee that the

Commissioner of Income Tax (Appeals) upheld the expenditure

incurred on improvement of leasehold property, the expenditure

being wooden partitions, false ceilings, carpet, other wooden

structure, interior work renovation and improvement of leased

premises and the nature of temporary structure were deprecation

was restricted to 10% as against 100% amounting �2,04,92,311/-.

ITA No. 1180, 1181 & others :- 45 -:

10.3 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative

were similar issue was adjudicated by us for the assessment year

2006-07 in ITA No.1181/Mds/2014 at para 5.6, we partly allow the

ground of the assessee.

10.4 In the result, the appeal of the assessee in ITA

No.1184/Mds/2014 is partly allowed for statistical purpose.

appeal is filed by the Revenue that the Commissioner of Income Tax

(Appeals) erred in allowing the deprecation at 60% on UPS as against

allowed by the Assessing Officer @15% of the value and the

Commissioner of Income Tax (Appeals) has not followed the decision of

Delhi Tribunal in the case of Nestle India Ltd vs. DCIT 111 TTJ 498 where

UPS is not treated as integral part of computer systems and higher

deprecation is allowed.

11.1 We have considered the facts and submissions made by the

ld. Authorised Representative and Departmental Representative

were similar issue was adjudicated by us for the assessment year

ITA No. 1180, 1181 & others :- 46 -:

2007-08 in ITA No.1412/Mds/2014 at para 7.5, we dismiss the

ground of the Revenue.

11.2 The second ground raised by the Department that the

Commissioner of Income Tax (Appeals) erred in disallowing software

expenses to the tune of � 18,42,169/-.

11.3 The assessee company has incurred an amount of

�4,57,98,871/- towards information technology charges. On perusal

the ld. Assessing Officer found major expenses relating to

maintenance of software and hardware installed by the company.

The ld. Assessing Officer found from the narration of expenditure,

certain items do not qualify as revenue expenditure because of its

enduring nature.

Date Particulars Amount <180 >180 days (�) days 09.04.08 Data soft computers – 488670 293202 service charges of network enhancement project 09.04.08 Data soft computers – 11330 6798 service charges of network enhancement project 21.08.08 Nuclear software exports 1139587 683752 Ltd – Finnone enhancement project 21.08.08 Nuclear software exports 145613 87368 Ltd – Finnone

ITA No. 1180, 1181 & others :- 47 -:

enhancement project 24.09.08 Nuclear software exports 744800 446880 Ltd –Nucleus support migration Version 3.2 to 3.4 07.11.08 Adrenain e-systems Ltd – 114000 34200 implementation charges 31.03.09 Nucleus charges 1071956 321587 enhancement 3715956 355787 1518000

The ld. Assessing Officer observed that the expenditure incurred

amounting to �37,15,956/- cannot be allowed as revenue expenditure

since it results in creating of an asset whose utility, falls in two financial

years. The ld. Assessing Officer relied on the decision of the Special

Bench of Delhi ITAT in the case of Amway Enterprises and capitalised

the same. The ld. Assessing Officer disallowed �18,42,169/- and added

to the taxable income. Aggrieved by the order, the assessee filed an

appeal before the Commissioner of Income Tax (Appeals).

11.4 The ld. Commissioner of Income Tax (Appeals) has considered

the findings of the Assessing Officer and relied on the jurisdictional

High Court in the case of CIT vs. Southern Roadways Ld (304 ITR 84)

held as under:-

‘’that expenditure incurred on software packages was revenue expenditure and that such software enhances the efficiency of the operation and was not an aid in the manufacturing process and therefore there is no enduring benefit or acquisition of any capital asset by an assessee. The concept of enduring benefit must respond to the changing economic realities of the business. The

ITA No. 1180, 1181 & others :- 48 -:

expenses incurred by installation of software packages in the present computer world, which revolves on the modem communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. However, such software itself does not work on a stand alone basis. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure’’

Moreover, these are paid on a yearly basis and therefore they are towards

maintenance of the software and TDS was also duly deducted and paid. As

the expenditure is revision in nature and has to be treated as revenue

expenditure. On the background of the factual position and judicial

precedents, ld. Commissioner of Income Tax (Appeals) allowed the ground

of the assessee. Aggrieved by the order of Commissioner of Income

Tax (Appeals), the Revenue assailed an appeal before Tribunal.

11.5. Before us, the ld. Departmental Representative submitted that

the ld. Commissioner of Income Tax (Appeals) erred in deleting the

disallowance of software expenses �18,42,169/- as revenue expenditure

and decision relied by the Madras High Court in the case of Southern

Roadways Ltd 304 ITR 84 has not attained finality and Department has

filed an SLP in Apex Court and prayed for allowing the appeal.

ITA No. 1180, 1181 & others :- 49 -:

11.6 Contra, the ld. AR has relied on the order of the Commissioner

of Income Tax (Appeals) and opposed the ground.

11.7 We heard the rival submissions, perused the material on

record and judicial decision relied. The ld. Authorised Representative

contention being that the assessee company incurred expenses of

software technology and major portion relates to maintenances of

software and hardware. We on perusal of the Assessing Officer order

at para 6.1, the assessee has claimed �37,15,956/- as annual

maintenance contract and prepaid contract charges but there is no

clarity whether the validity of software is for one year period or more as

operational software and licence fee. Therefore, we set aside the order

of Commissioner of Income Tax (Appeals) and remit the issue to the file

of the Assessing Officer to verify the characteristic of software

expenditure whether it pertain to installation expense or maintenance

expenses or licence fee or operational fees and allow the expenditure if

its usage is less than one year and balance to be capitalised and allow

deprecation.

11.8 In the result, the appeal of the Revenue in ITA

No.1432/Mds/2014 of assessment year 2009-2010 is partly allowed.

ITA No. 1180, 1181 & others :- 50 -:

Order pronounced on Thursday, the 28th day of April, 2016, at Chennai.

Sd/- Sd/-

(चं� पूजार�) (जी. पवन कुमार) (CHANDRA POOJARI) (G. PAVAN KUMAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:28.04.2016 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF